Post on 26-Dec-2015
Pragmatic changes envisaged
• Income Tax Act……… Direct Tax Code
• VAT, Service Tax,CE …..GST
• Companies Act…. New Companies Act
• Accounting Standard….. Indian AS
• SAP/AAS/SA………?
• Above all EDP/ISA and so called paperless working
Challenges before practioners• Keep update for changes
• Big Enterprises/Blue chip Vis a vis SMEs
• Big 4 Practioners Vis a vis SME Practioners
• Circumstances under SME Practioner works
• Statements, standards,Guidance Notes are at PAR for all practioners
• Need to educate entrepreneur/accountant of Auditee about AS
• Study of AS is not any new thing or ideas
• Systematic and uniform principles to guide:
Accounting, presentation and disclosures
• Prudence and Materiality plays important
role
• To refresh your memory the stydy circle meeting
Thus the source of Indian ‘GAAP’ are :1. The Statutory Requirements, such as :
The statutory requirements of Companies Act ; 1956 more particularly contained in Section 210 and 211 with
Schedule VI of the Act-True and Fair and 227 - reporting
The statutory requirements of Banking Regulation Act ; 1949 and Insurance Act; 1938.2. The requirements of Regulatory Authorities, such as :
Reserve Bank of India Securities Exchange Board of India
3. Pronouncement of the Premier accounting body ICAI, such as : Accounting Standard Statement of Accounting matters Guidance Notes Opinions of Expert Advisory Committee
4. Practices and Uses such as : Published Accounts of renowned companies. Articles and Opinions
5. Income Tax Standards – Court Judgements
ATTEST FUNCTION1. In India the profession of Accountancy has been recognised and
provided with the attest function for certification of accounts.
2. Society confidence Vs. Expectations – Code of Conduct.
3. The Chartered Accountants Act 1949 Section 21-22 contains detailed provision in respect of misconduct.
4. Second schedules part I clause 7 & 9 provides that “A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he :
“7. Is grossly negligent in the conduct of his professional duties;”
“9. Fails to invite attention to any material departure from the Generally Accepted Procedure of audit applicable to circumstances;”
5. Duty bound to follow ICAI Announcements.6. Documents issued by Institute :
Statements=> Accounting matters=> Auditing Matters
Guidance Notes Accounting Standards (AS) Statements of Standard Auditing
Practices (SAP’s)# Opinions Expert Advisory Committee is
another though not general, important document
Accounting Standard - 6
Depreciation Accounting
Does not apply to :
forests, plantations etc.
expenditure on R&D
wasting assets
live-stock
goodwillland
DepreciationWhat it is?
A measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, affluxion of time or obsolescence through technology/market changes
Depreciable AssetsExpected to be used for more than one accounting
periodHaving a limited useful lifeHeld for use in production/supply of goods/ services,
letting out to others, administrative purpose, and not for sale in ordinary course of business
Useful LifePeriod over which a depreciable asset is expected to be
usedOR
Number of production units expected to be obtained from use of asset
Useful life is shorter than physical life and is: predetermined by legal/contractual limits directly governed by extraction/consumption dependent on extent of use and physical deterioration on
account of wear and tear reduced by obsolescence arising from
technological/market changes, legal restrictions
DEPRECIATIONAmount determination
Depreciable amount of a depreciable asset should be allocated on a systematic basis during useful life
Relevant factorsHistorical cost/other substituted amountExpected useful lifeEstimated residual value
Depreciable AmountHistorical Cost (or other substituted amount)
lessEstimated residual value
Depreciation Method: Change
Normally consistency should be maintainedChange only if … (same considerations as
applicable for APs)Recalculation from inception on changeDifference (Deficiency/Surplus), to be adjusted
in year of changeChange to be treated a change in AP
DepreciationWhere Changes Prospectively
Useful life should be reviewed periodically: unamortised amount to be charged in remaining useful life
Change in historical cost due to exchange fluctuations in relative long term liability etc.: revised unamortised amount be depreciated over residual useful life
Revaluation of assets: depreciation on revalued amount over remaining useful life
Additions becoming integral part of asset: to be depreciated over remaining useful life of asset. However, if addition retains separate identity/capable of being independently used, depreciation should be provided independently.
DisclosureGENERAL
Historical cost/other amount substituted for each classTotal depreciation of the period for each classRelated accumulated depreciation
ALONG WITH APMethods usedRates or useful life, if different than principal statutory rates
SPECIFICIf revaluation materially affects depreciation : such effect in year of changeIf any asset is discarded/disposed off/demolished/destroyed : net surplus or deficiency, if material
Accounting for Fixed Assets
Accounting Standard - 10
Accounting of forests/ plantations etc., wasting assets, expenditure on real estate development and livestock
Inflation Accounting of fixed assets
Allocation of depreciation
Treatment of Subsidies etc.
Assets under leasing rights
This does not deal with
DefinitionsFixed Assets
Assets held with intention of being used for producing goods, providing services
etc. & not for sale in ordinary course
FAIR Market Value (FMV)
Value agreed in open & unrestricted market between
parties dealing at arm’s length
Gross Book Value
Historical cost or other amount substituted for historical cost
Identification of Assets
Material Vs. Not Material Amounts
Stand by and Servicing Equipments are normally capitalised.
Spares (Machinery) Normally – Profit & loss- irregular depends on life.
Nature of Assets- Separable like Aircraft and its Engine
Components of Cost Cost of purchase
Cost attributable in bringing the asset in working condition
Financing cost upto the asset being ready for use
Expenditure incurred on start – up and commissioning of project.
(internal profits be eliminated in case of self construction)
Ready to use – Actual useExpenses in between are to
be charged to P & L
Cost – When and How at FMVWhere the asset is acquired in exchange of:
Another Asset/Shares of the Enterprise
(FMV of that asset which is more clearly evident)
Subsequent expenditures :When included in Cost?
If they increase the future benefits
Addition of asset having separate identity Should be considered as separate asset
Disposal / Retirement of Asset Assets retired from active use and held for disposal to be
stated at lower of net book value and NRV : to shown separately
Assets to be eliminated from FS on disposal or when no further benefit is expected
Losses from retirement or Gain/ Loss from disposal to be recognised in P & L
On disposal of revalued asset gain / loss to be taken to P & L except where a loss relates to an increase available in RR, when it may be charged to RR
Revaluation of Fixed Assets If revalued, entire class be revalued. Or selection to
be on systematic basis : basis to be disclosed Revaluation not to exceed recoverable amount of a
class of assets On upward revaluation, accumulated depreciation
not to be credited to P&L Increase to be credited to revaluation reserve (RR)
except to extent of earlier decrease charged to P&L,which may be taken to P&L
Decrease to be charged to P&L except to extent ofof earlier increase standing in RR(unutilised),which may be debited to RR
Acquisition – Specific Modes
Assets acquired on Hire Purchase terms to be
recorded on Cash Value (actual / calculated) :
Disclaimer of ownership be indicated
Joint Ownership : Extent of share & Proportion of
all related figures be disclosed
Purchase of several assets for consolidated price :
apportionment on basis of competent valuer’s
valuation
Other Important Issues Goodwill be recorded only when acquired for consideration. Where in acquisition of business, price paid is in excess of net assets taken over, excess be termed as goodwill. Direct cost for development of patents be capitalised and w/off over legal term/ working life, whichever is shorter. Payment for know-how for plans, layouts etc. of assets be capitalised under respective heads. If know how is composite, apportionment be made
on reasonable basis.
Disclosure Gross & net book value : Opening / Closing
showing additions, disposals etc.
Expenditure on FA during construction /
acquisition
Revalued amounts substituted for historical
costs, method of revaluation, nature of indices,
year of appraisal and fact of involving external
valuer
Accounting Standard -12ACCOUNTING FOR
GOVERNMENT GRANTSIt does not deal with : Inflation Accounting of Grants Government assistance other than grants Government participation in ownership
Government GrantsMeaning
Assistance by government in cash or kind for past or future
compliance of certain conditions
ImportanceIn Financial StatementsFacilitates comparison with
other enterprise / prior period
•Govt. here includes govt. agencies/ bodies(local/national/international)
Recognition of Government GrantShould not be recognised until reasonable assurance of:
Compliance with conditions & Receipt of Grant
Should not be taken to P&L as:
• Generally are in nature of promoters’ contribution
• They are not earned but represent incentive without cost
Should be taken to P&L as:• Rarely gratuitous
• Govt. levies are also charge against income
• To correlate with exp.. to which grant relates
Accounting TreatmentCapital approach Income approach
However, it should be based on nature of each grant.
Grants related to Specific F/A : Treatment
Should be deducted from Gross Value(if grant is equal to cost, asset should be shown at
nominal value)
Alternatively Defer income on systematic basis over useful life
(for depreciable assets) Take to capital reserve.
(for other assets) •However if requires fulfillment of obligations, be credited to
income over matching period \
Other GrantsRevenue Grants
• To be recognised on systematic basis in P&L.Either as other income or deduction from related expenses.
• If receivable as compensation for expense/ loss of preceding year or as immediate financial support, consider AS 5 for disclosure as extraordinary item
Promoters ContributionTake to capital reserve, treat shareholders’ fund
Assets at concessional rates / free of
costAccount for at acquisition cost / nominal value
Grants becoming refundableAn extraordinary item
If revenueApply first against available unamortised credit balance
/ remaining charge to P&L
If related to F/AIncrease book value / reduce capital reserve / deferred
income (in first case, change depreciation prospectively)
If promoters’ contributionReduce from Capital Reserve
D i s c l o s u r e
• Accounting Policy adopted including
methods of presentation
• Nature and extent of grant recognised
including non monetary assets given at
concessional rates / free of cost
Accounting Standard - 13
Accounting for
Investment
Does not deal with :
Bases for recognition of interest, dividends &
rentals earned on investment which are covered by
AS-9
Operating/finance leases
Investments of retirement benefit plans and life
insurance enterprises
Investments• Assets held for earning income, capital appreciation,
other benefits. Stock-in-trade is not investment
Current investment• Investment readily realisable and is intended to be
held for not more than one year from the date of making such investment
Long term investment• Investment other than current investment
Investment property• Investment in land/buildings that are not intended
to be occupied substantially for use
Market value• Amount, net of expenses, obtainable from the sale
of investment in open market
COST OF INVESTMENT
should include acquisition charges (brokerage, fee etc.) if acquired in exchange of shares/securities then fair
value of such shares/securities should be taken as cost if acquired in exchange of other assets then fair value of those assets which is more clearly evident should be taken as cost Interest/ Rentals/ Dividends are generally Income.
However it may be recovery of cost where relates to pre acquisition period.
Investments Carrying AmountCURRENT INVESTMENTS
LOWER OF COST & FV(comparison not be on global basis)LONG-TERM INVESTMENTS
AT COSTHowever, provision be made for decline
in value, which is not temporary, on individual basis
Any reduction / reversal of reduction in carrying
amount On disposal, the surplus /
deficiency
Charge / credit to P&L a/c
DISCLOSUREClassification of investmentAmounts included in P&L a/c
AP of determination of carrying amount Income from investments separately for current/LT at gross
figure Profit/Loss on disposal of investments and changes in
carrying amount separately for current/LT investments Significant restrictions on ownership/realisability of
income/disposal proceeds Aggregate amount of quoted/unquoted investments and MV
of quoted investments Other statutory disclosures
Accounting Standard - 14
Amalgamation means an amalgamationpursuant to the provisions of the
Companies Act, 1956 orother law applicable
to companies
Accounting for Amalgamations
Amalgamation in the nature of Merger
All assets / liability to become, of, transferee co.
Shareholders > 90% of equity share capital of transferor co. become that of transferee co.
Consideration discharged by issue of equity shares
Business is intended to be carried by transferee co.
No adjustment is intended in book values of A/L on incorporation in books of transferee co. except to ensure uniformity of Accounting Policy
If any condition is not satisfied, it would be amalgamation in the nature of purchase
AMALGAMATION
IN THE NATURE OF MERGER A n M
IN THE NATURE OF PURCHASE A n P
Pooling of interest method Purchase method
Pooling of Interest Method all Assets-Liabilities/Reserves should be incorporated at existing carrying amt. In same form. Balance of P&L a/c to be merged with corresponding amount and in absence, with General Reserve If APs are conflicting – adopt uniform AP – disclose effect as per AS-5 difference between consideration and share capital of transferor company to be adjusted in Reserves
Purchase Method* A/L to be incorporated at existing carrying amounts or, alternatively, the consideration be allocated to individual identifiable assets/liabilities on the basis of FV.* No reserves, except statutory reserves, shall be incorporated* Difference between consideration and net assets be recognised as Goodwill/capital reserve* Goodwill be amortised over useful life generally not exceeding 5 years.* Statutory Reserves, on complying with requirements, should be incorporated by corresponding debit to ‘Amalgamation Adjustment a/c’ under head Misc. Exp.- Reversal by cross-entry of two accounts
•Non cash element of consideration to be at fair value
•If some contingency exists as to the amount of consideration, apply AS4
•If scheme of amalgamation statutorily sanctioned prescribe particular treatment of revenues, same be followed
Common Procedures
FOR ALL• names/general nature of business of amalgamating companies• effective date of amalgamation• method of accounting • particulars of scheme
FOR POOLING METHOD•description/no. of shares issued and ratio of exchange• difference between consideration and net asset acquired – treatment thereof
FOR PURCHASE METHOD•consideration – description thereof• difference……. (same as above), including treatment of goodwill
AFTER BALANCE SHEET DATE•disclosure in accordance with AS-4
DISCLOSURE
Accounting for Retirement Benefits in
the Financial Statement of Employers
Accounting Standard - 15PF
PensionSuperannuationGratuity
LeaveEncashmentOthers
RETIREMENT BENEFITS
DEFINED CONTRIBUTION SCHEMES
eg. P.F.etc.
DEFINED BENEFIT
SCHEMES eg. Gratuity etc.
Accounting Treatment
Defined contribution scheme
* Charged to P&L A/C
- Contribution for the year
- Shortfall between paid & payable
amount
* Excess payment, if any, it treated as per
payment
Accounting TreatmentSELF FUNDING•Annual contribution determined by insurer to be charged to P&L a/c• Appropriate charge to P&L a/c each year• Amount as per actuarial valuation or other rational method
TRUSTS•Costs determined through actuarial valuation at least once in 3 years• Amount as per actuarial valuation to be charged to P&L a/c each year
INSURER’S SCHEME
•Annual contribution determined by insurer to be charged to P&L a/c
Accounting TreatmentDefined Benefit
SchemeSelf Funding
-Appropriate amount
charge to P&L a/c
- Amount as per
actuarial valuation or
other rational method
Trust-Cost for the year- Cost should be determined through actuarial valuation at least once in 3 year- Shortfall between amount actually paid over payable charge to P&L A/c- Excess payment should be treated as prepayment
Insurer’s Scheme
-Annual
contribution
determined by
insurers to be
charged to
P&L A/c.
Treatment of Alternation
Alternation arising from introduction / or additional benefits to retired
employees or changes in actuarial method
Charge/credit to P&L a/c Follow AS - 5
Disclosure Method of determining R/B cost
Whether Actuarial Valuation
was made at the end of period or
any prior date? Disclose said prior
date and method for determining
cost for the period
Accounting Standard – 16
BORROWING COSTSA.Borrowing Costs : Interest and other costs related to
borrowed funds like,a. Interest and commitment charges.b. Discounts or premiums.c. Ancillary costs.d. Finance charges as under finance lease.e. Exchange differences from foreign currency.
B.Qualifying Assets : Those which require substantial time to get ready for intended use or sale like,a. Manufacturing plantsb. Power generation facilitiesc. Inventories that required substantial periods of
time to bring them to saleable condition.
RECOGNITION OF COSTA. All Borrowing Costs
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset
Future economic benefit
Measurement possible
Capitalise as part of the cost of qualifying asset
Other Borrowing
costs
Charge to P/L
B. a. In case of funds specifically borrowed for
qualifying assets:
Borrowing Costs Actual borrowing Income on
temporary
to be capitalised cost incurred investment of
funds
b. In case of general borrowings:
Borrowing Costs = Capitalisation rate* x Expenditure on the
asset
Capitalisation rate = Weighted Average of outstanding
borrowing cost (excluding cost of specific borrowings).
= -
CAPITALISATION OF BORROWING COST
1. COMMENCEMENT : ALL 3 conditions below to be
satisfied:
a. Expenses incurred must be for acquisition / construction /
production of qualifying asset.
b. Cost incurred must be borrowing cost.
c. Activities preparing the asset for intended use or sale must
be in progress. Such activities include related technical and
administrative work.
2. SUSPENSION : asset for intended use or sale) or asset is
interrupted. Except when:
a. Substantial technical/administrative work being done.
b. Temporary delay is inherent in the process.
CESSATION
When activities preparing the asset for intended use or sale are
substantially complete. In case of completion in parts, cost of
completed part to be ceased for capitalisation.
DISCLOSURE
• Accounting policies.
• Amount capitalised as borrowing costs.
Accounting Standard – 17
Segment Reporting
Application from 1.4.01 to :* Enterprises listed/in the process of being listed in a recognised stock
exchange in India.
* Other enterprises with a turnover of more than Rs.50 crores.
Definitions:Business Segment
.
Factors for Consideration Nature of products/services.
Nature of production process.
Method used to distribute products/provide services.
Type/class of target customers.
Nature of regulatory environment, if applicable
Geographical Segment Qua location of offices or Qua location of customer
Factors for ConsiderationSimilarity of economic and political conditions.
Operational relationship in various geographical areas.Operational proximity.
Special operational risks in a specific area.Exchange control regulations.
Currency risks.
Reportable Segment A business / geographical segment required to be disclosed under this
standard.
Enterprise Revenue Revenue from sale to external customers as per the P&L A/C.
Segment Results = Segment Revenue – Segment Expenses
Segment Revenue ER directly attributable to a segment.
+
ER allocated to segment on a reasonable basis.+
Revenue from transactions with other segments.Excluding
Extraordinary items as per AS-5.Interest & dividend income, provided the segmental
operations are not of a financial nature.Profit on sale of investments/extinguishment of
debts, provided the segmental operations are not of a
financial nature.
Segment ExpensesExpenses in a segment directly attributable to it.
+
Enterprise expenses allocated to segment on a reasonable basis.+
Expenses from transactions with other segments.
ExcludingExtraordinary items as per AS-5.
Interest expenses, provided the segmental operational are not of
a financial nature.Income-Tax expenses.
Head-office/Corporate office expenses.
Segment Assets Directly attributable /allocated Assets
Where segment result includes interest/dividend income, the related asset should be included in segment assets.
Allowances/provisions reported as direct offsets in the Balance sheet should be reduced from the related asset.
Income tax assets are to be excluded.
Segment LiabilitiesDirectly attributable /allocated liabilities
Where interest expense is considered in segment result, corresponding liability is to be included in segment liabilities. Income tax liabilities are to be excluded.
Segment Accounting PoliciesPolicies relating to preparation and presentation of financial statements and
those relating to segmental reporting.
Identifying Reportable Segments
Either
Primary = Business
Secondary = Geography
Or
Primary = Geography
Secondary = Business
Depending upon
Dominant source & nature of risk & returns
Normally indicated byInternal organisation & Management Structure
System of internal financial reporting to BOD/CEO
Exceptional Situations I II
Risk and Returns strongly affected by both
Product / Service and Geographically
Internal Management Structure / Reporting
System neither based on Product / Service nor
Geographically
Primary = Business
Secondary = Geographically
Directors and Management to decide Primary and Secondary
segment based on conditions discussion in
earlier slide.
Reportable Segment –A
Segment whose
are 10% or more of
Segment RevenueSegment Results
Profit or LossSegment Assets
Segment Revenue (and Not Enterprise Revenue
the greater of Segment Profit (of Profit Segment) Segment Loss (of Loss Segment)
Segment Assets
Reporting Segment : Example : Segment Results
Segment Segment Results Reportable
A - 4,00,000
B + 50,000
C + 2,00,000
D - 20,000
E + 3,00,000
Enterprise Result 1,30,000
Segment Profit 5,50,000
Segment Loss 4,20,000
Reportable Segment –B
Segments chosen by Management despite of small size
Smaller segments (below 10%) if external revenue of reportable
segments construes less then 75% of total enterprise revenue – until
75% of total enterprise revenue is included in reportable segment.
Segment identified as reportable in immediately preceding year
should continue as reportable segment
Preceding year figures should be restated if segment identified as
reportable in current year was not reportable in preceding year.
Segment Accounting Policies
Follow policies adopted for preparation and presentation of
enterprise financial statement.
Allocate joint segment assets and liabilities between segments only
if the related revenue / expenses are also allocated.
DISCLOSURE
Reporting for each Primary Segment
Segment revenue – classified as external / internal / inter-
segment revenue.
Segment result.
Carrying amount of segment assets.
Carrying amount of segment liabilities.
Additions to segment tangible and intangible F/A
Only When Segments cash flow are not reports
Depreciation and amortisation of segment assets Total significant non-cash expenses other than
depreciation/amortisation above
Notes :
A reconciliation segment information and enterprise financial statement
oSegment revenue for each segment based on
geo. location whose external revenue is
10% or more of enterprise revenue oSegment assets for
each segment based on geo. Location if > 10% of total assets of geo.
SegmentsoAdditions to assets for each segment based on geo. location of assets of
10% or more of total
oSegment whose revenue from sale > 10% of ER or
segment asset > 10%of total assets then
• Segment revenue from external customer
•Total carrying amount of segment assets
•Cost incurred to acquire assets
oWhere location of customer different from
assets•Geographical segment
whose sales > 10% of ER
oSegment whose revenue from sale > 10% of ER or
asset > 10% total assets then:
• Segment revenue from external customer
•Carrying amount of S/A•Cost incurred to acquire
S/AoWhere location of assets
different from that of customers then GS whose
revenue/asset > 10% of enterprise
•Carrying amount of S/A geographically
•Cost incurred to acquire assets
Business Segment Geographical Segment based on AssetsGeographica
l Segment based on
Customers
If Primary is
OTHER DISCLOSURE
Inter-segment transfers, their basis of pricing
and change
Changes in accounting policies for segment
reporting – fact and effect.
Composition of BS/GS, both primary and
secondary, if not otherwise disclosed.
* Kuoni, Switzerland * Switzerland; United Kingdom; International; Incoming
* LVMH, France * France; Europe (excluding France): USA; Japan; Far East (excluding Japan); Other
* Novartis, Swirtzerland
* Europe; Americas; Asis, Africa and Australia
* Roche, Switzerland * Switzerland; European Union; Rest of Europe; North American; Latin America; Asia, Africa, Australia
and Oceania
Geographical Segments – Reporting under IASs - I
•ABB, Sweden and
Switzerland
* Power generation; Power transmission and distribution; Industrial and building systems; Financial services; Various activities and corporate.
* Fujitsu, Japan * Information Technology
* LVMH, France * Champagne and Wines; Cognac and spirits; Fashion and leather goods; Fragrances and cosmetics; Selective retailing; Other
* Nokia, Finland * Telecommunications; Mobile phones; Other Operations
* Novarties, Switzerland * Healtheare; Agribusiness; Nutrition; Corporate
* Roche, Switzerland * Pharmaceuticals; Vitamins and fine chemicals; Diagnostics; Healthcare;
Fragrances and flavours
Business Segments IASs - II
Primary Secondary
•Segment Revenue - External Customers - Other Segments
•Segment Result
•Segment Assets
•Total Capital Expenditure
•Total Expenses-Depreciation and Amortisation
•Total Non-Cash Expenses other than Depreciation and Amortisation
•Reconciliation to Financial Statement
•Basis of Pricing Inter-Segment Transfers
•Changes in Segment Accounting Policies
•Composition of each Business Segment
•Composition of each geographical Segment
Accounting Standard – 18Related Parties
* Establish Disclosure requirements
- Related Party Relationships
- Transactions with related Parties
Scope
Conflict with confidentiality required by Statute
State Controlled Enterprises
CFS in respect of intra-group transactions
Enterprises having
Turnover less than 50
Crores
Does not applies to
Relationship Covered
Enterprises under significant control of first two above
Key management personal and relatives
Individuals directly or indirectly exercising control or significant influence
Associates and Joint Ventures
Enterprises directly or indirectly under common control
Deemed Not to beRelated Parties
•Companies having Common Directors
•Economic Dependence
Single customer / supplier / franchiser
distributor / general agent.
•Parties dealing in the normal course of business. providers of finance
Trade unions
public utilities
government departments and government agencies agencies
including government sponsored bodies
Related PartyParty which has ability to control or exercise significant influence
Control•Ownership directly or indirectly of voting power > 50%
•Control over composition BOD
•Substantial interest in voting power
Key Management PersonalPersons having authority and responsibility for planning,
directing and controlling
RationaleAre normal feature of commerce and business
Without Disclosure General presumption
•Transactions at Arm’s length
•Transaction by two independent parties
Existence of relationship is likely to influence the transaction
Inherent difficulty in determine effect of relationship
Transactions which took place only due to relationship
Disclosure Name/Nature of relationship of parties
Description of the relationshipName of transacting PartyNature of transactions;
Volume of the transactions – In absolute/Relative Terms
Any other Element for better understanding
Amounts and appropriate proportions of outstanding provisions for doubtful debts due
Amounts written off or written back
Examples of the Related Party Transactions
Purchases or sales of goods
Purchases or sales of fixed assets
Rendering or receiving of services
Agency arrangements
Leasing or hire purchase arrangements
Transfer of research and development
License agreements
Finance
Guarantees and collaterals
Management contracts including for deputation of employees.
Accounting Standard – 19
LEASES
SCOPE/ APPLICABILITY
Agreement for motion picture, film, video recording, plays
manuscripts, patents & copyrights
Agreement to use
national resources.
Agreements to use Land Does not applies to
DEFINITIONSLease
Agreement for transfer of right to use asset for an agreed period in return of payments
Finance Lease
Which transfers substantial risks and rewards of ownership
Operating Lease
Other than finance lease
Non-cancelable Lease
Which is Cancelable only on
Remote contingency
Permission of lessor
New lease with same lessor for similar assets
Payment of additional amount by lessee
Minimum Lease Payment (MLP) Payment by lessee excluding contingent cost of services
and taxes but includes
For lessee For lessor
RV guaranteed
on his behalf
RV guaranteed by or on behalf of lessee by and
independent party
Economic Life
Period for which economically usable or number of production units expected to be obtained
Gross Investment
MLP + UGRV
Unearned finance income
GI –[ MIP + URGV]
Net Investment
GI-UFI
Contingent Rent
Lease payment which is not fixed
Unguranteed RV
Amount of RV > GRV
Finance Lease
Transfer of ownership of lessee
Option to purchase the assets at a price lower than the fair value which is reasonable certain to be exercised
Term covers major part of the economic life of asset
Present value of MLP amounts to fair value of asset at inception
Unique use of asset by the lessee
Characteristics
Operating Lease
On cancellation losses borne by lessee
Gains/losses from fluctuation in FV borne by lessee
Option of continuance for secondary period at rent substantially lower than market value
In books of Lessee In books of Lessor
•Recognized Asset and Liability at FV
•If FV > PV of MLP then at PV of MLP
•PV computation, Discount Rate =Interest Rate Implicit
•Apportion LP into finance charges and outstanding liability
•Finance charges to be allocated at constant periodic rate of interest.
•Depreciation should be accounted according to AS -6 If no reasonable
certainty of ownership then depreciated over the lease term
•Recognize asset at amount equal
to NI
•Finance income to be recognize at
constant periodic rate of return
•Sales to be recognized as per
accounting policy
•Sales should be restricted to
amount after applying commercial
rate of interest
•Indirect expenses charged to
P&L
DISCLOSUREFinance Lease
In books of Lessee In books of Lessor
•Total future MLP under non cancelable
lease for each of the following period:
not later than one year
later than one but not later than five years
later than five years.
•Total future minimum sublease payments
expected to be received
In addition to AS-10 & AS-6 :
•For each class of assetthe gross carrying amountthe accumulated depreciationaccumulated impairment loss at balance sheet datedepreciation impairment losses, recognized/ reversed in P&L A/c.
•Total contingent rent recognized as income in P&L A/c. for the period.
•Future MLP under non cancelable leases in aggregate and for each of the following period:
Operating Lease
•LP charged to P&L alongwith MLP &
Contingent rent
•Sub lease payment received or
receivable
•General description of significant
leasing arrangements including :
basis of contingent rent
existence and terms of renewal or
purchase options and escalation
clauses
restrictions imposed by lease
agreements
not later than one year
later than one year and not later
than five year later than five year
•General description of significant
leasing arrangements.
•Accounting policy in respect of
initial direct cost.
Sale and Lease Back Transactions
WHEN
Any surplus/deficiency in
sale proceeds be deferred
and amortised over the
lease term in proportion to
the depreciation
Any surplus/deficiency should be recognized immediately except if the sale price is below FV and be compensated by future lease payments should be deferred and amortised in proportion lease payment.
If the value is less than the carrying amount, difference should be recognized immediately
Transaction results in operating
leaseTransactions results in
finance lease
Operating Lease :
(a) Sale at Fair value – any P/L to be recognised separately
Carrying value - 100
Fair Value - 150
Sales Value - 150
Since sale is at fair value, there is no impact of lease back package
Carrying value - 100Fair Value - 150Sales Value-if Rs. 140 – Profit Rs. 40-If Rs. 90 – Loss Rs. 10
P/L to be recognised immediately except
- if loss is compensated by future lease payments below market price
(b) Sales at below fair value
Carrying value - 100Fair Value - 150Sales Value - 160
Out of profit of Rs. 60/- Rs. 10/- (i.e. over fair value) to be amortised and Rs. 50/- (i.e. difference between fair value & carrying value) to be recognised immediately
(c) Sales at below fair value
Accounting Standard – 20
EARNING PER SHARE
Objective
Applicability/Scope
Enterprises
Whose E/PES are listed
Which are disclosing EPS otherwise
Requirements applicable to CFS
Improve comparisonMake EPS
more compatible
Simplify computation of
EPS
Potential Equity Shares (PES)
Financial Instrument / other contract, which entitles / may entitle its holder to equity shares.
Financial Instruments (FI)
Contract giving rise to:
FA of one and FL or ES of another Enterprise
Financial Asset (FA)
Cash
Contractual right to receive cash
Contractual right to exchange FI
ES of other enterprise
Potential Equity Shares
Convertible Debt/Preference Shares
Share Warrant
Options
Contractual / Contingent Shares
What areBasic EPS
Per share profit attributable to Existing Equity Shareholders.
Diluted EPS
Per share profits attributable to Existing and Potential Equity Share-holder.
Basic EPS – How Measured
Division of Net Profit or Loss by Weighted Average no. of ES outstanding
Earnings - Basic
Net Profit or Loss attributable to ES holders
Per Share – Basic
Weighted Average no. of ES O/S during the period
Date of inclusion* ES of different nominal values (with same division rights)
* Effect of Change in no. of ES without corresponding change in resources otherwise than by conversion of PES for all periods
* Bonus Shares / Share Split
Changes in No. of ES without corresponding change in resources* Right Issue & Calculation of No. of ES
For all prior periods: No. of ES O/s multiplied by –
FV per ES prior to right
Theoretical ex-rights FV per Share
Where the denominator is calculated by dividing (Total FV of all ES prior to right + proceeds of right) by no. of ES O/s after exercise of right.
Weighted Average no. of ES
Includes shares from the date consideration is received
Inclusion in case of Amalgamation
AnP AnM
From the date acquisition From beginning of reporting period
Partly paid ES treated as fractions
In case different rights shares equivalent no. of shares
Contingent issue from the date conditions complied
Adjustment for change in no. without corresponding change in resources except conversion of PES such as
•Bonus
•Bonus element in right issue
•Split/reverse split
Bonus to be adjusted for all periods reported
No. of shares in case right issue with bonus element
Share OS prior to right X (FV/Share prior to right)
Theoretical ex-right FV / share
Right Issue – ExampleAccounting Year Ending on 31.12.2001
No. of shares O/s Prior to Right (FV Rs. 21/-) 500000
Right Issue on 1.3.2001 (1 to 5) (Rs. 15/-) 100000
Theoratical ex-right FV come to Rs. 20/- as under :
(500000 x 21) + (100000 x 15)
500000 + 100000
Adjustment Factor (2120) = 1.05
Outstanding ES for the year :
(50000 x 1.05 x 212) + (600000 x 1012)
Preceding Years O/s shares shall also be adjusted.
Diluted EPS – How MeasuredDivision of Net Profit or Loss by Weighted Average no. of ES O/s –
both adjusted for dilutive PES
Net Profit or Loss Attributable to ES holders including Dilutive PES i.e. after :
- Dividend (including tax) & Interest (after tax) on PES
- Other expense / income (after tax) attributable to PES
Weighted Average no. of ES Weighted Avg. of total No. of ES including shares to be issued on conversion of Dilutive PES deeming the same as converted in ES. PES shall be deemed to have been so converted, in case such PES.
- issued earlier, at Beginning of the year.
- issue later, on the dated of issue of PES.
Diluted EPS – Relevant Issues•Assumed exercise of dilutive option/PES
•Proceeds at fair value
•Difference in no. of shares issuable and shares would have been
issued at FV to be treated as without consideration
•Option dilutive when results in issue at lower than FV
•PES treated as dilutive only when leads to reduction in profit
•Only dilutive PES – Anti-dilutive to be ignored
•Shares issued at FV treated as Anti-dilutive
If no. of ES or PES OS changes for the reason of issue of
bonus shares, split or consolidation:
•Adjust Basic & Diluted EPS for all the period presented
•Even when Change is after b/s date, these have to be adjusted
•If per share calculation reflects change in no. of shares, fact to
be disclosed
Restatement
Presentation of Basic & Diluted EPS
For each class of ES
on face of P&L
equal prominence for all periods presented
even if negative
Amount used as numerator for basic/diluted alongwith reconciliation
No. of shares for basic/diluted EPS used as denominator with reconciliation thereof
Nominal value of shares with EPS
Example – Effects of Share Options on Diluted EPS
Net Profit for the year 2001 Rs. 12,00,000
Weighted average number of equity shares outstanding during the year 2001 5,00,000 shares
Average fair value of one equity share during the year 2001 Rs. 20.00
Weighted average number of shares under option during the year 2001 1,00,000 shares
Exercise price for shares under option during the year 2001 Rs. 15.00
Earnings Shares EPS
Net profit for the year 2001 Rs. 12,00,000
Weighted average number of shares outstanding during year 2001
5,00,000
Basic EPS Rs. 2.40
Number of shares under option 1,00,000
Number of shares that would have been issued at fair value: (1,00,000 X 15.0) / 20.00
* (75,000)
Diluted EPS Rs. 12,00,000 5,25,000 Rs. 2.29
* The earning have not been increased as the total number of shares has been increased only by the number of shares (25,000) deemed for the purpose of the computation to have been issued for no consideration
Computation of EPS
Accounting
Standard – 21
Consolidated Financial
Statements
DOES NOT DEAL WITH:
Amalgamations & their effects on consolidation
goodwill arising out of amalgamation
Accounting for investment in associates
Accounting for investment in joint ventures
DEFINITIONS
Control
ownership, directly or indirectly through subsidiaries, of more than half of voting
power
control over composition of board of director/governing body.
Minority Interest
That part of net results and of net assets of subsidiary attributable to interest not owned- directly or indirectly, by the parent.
Minority interest in net assets:
amount of equity
share of movements in equity since
date relationship
SCOPE
• Parent to present CFS;
• consolidate all subsidiaries, domestic and foreign
other than
Temporary control
(subsidiary held & acquired for disposal in near future.)
severe long term restrictions on subsidiary which significantly impair its ability to transfer funds to parent.
Investment -as per Accounting Standard 13.
Reasons for not consolidating -disclosed in CFS.
PROCEDURE
Line by line, adding like items
Cost to parent of investment & parent’s portion of equity
eliminated
If Cost > Parent’s portion then Goodwill
If Cost < Parent’s portion then Capital Reserve
Arrive at net income attributable to owners of parent after
adjusting minority interest Present minority interest in consolidated B/S separately
Intragroup balance Intergroup transaction eliminated.
Unrealisable losses from intragroup transactions
eliminated (don’t eliminate when even cost can’t be
recovered)
Financial statement used in consolidation to be drawn
upto same reporting date.
If not practicable - in any case difference between
reporting dates not be more than six months.
Uniform accounting policies
(If not practicable, disclose fact)
Investment in enterprises ceasing to be subsidiary- doesn’t
become associate - Accounted as per Accounting
Standard 13.
Investment in subsidiary in parent’s separate financial
statement as per Accounting Standard 13.
Presentation
Parent which presents CFS should do so in addition to separate
financial statement
Disclosure
• List of all subsidiary name,
• country of incorporation
• proportion of ownership interest
• Nature of relationship
• Effect financial position at reporting date
• Results for reporting period also
• Names of subsidiary whose reporting date is different
Accounting Standard – 22
ACCOUNTING FOR TAXES ON
INCOME
Objective
Determination of Expenses and Savings of Tax
in an Accounting
Period
Matching of Taxes with Revenue
Eliminate effect of difference in tax and book profit
Prescribed Treatment of
Taxes
APPLICABILITY/SCOPE
Mandatory from
1.4.2001
•Enterprise whose equity/debt securities listed or likely to be listed on recognized stock exchange
•Enterprise of a group whose parent follow AS 22 in CFS
1.4.2002
All other companies whose securities are not listed
1.4.2003
All other enterpirses
Introduction Accrual A fundamental accounting assumption
Tax Expense Recognition RuleSame Period of recognition of Revenue/ Expenses
For accounting purpose should be based on accounting income and taxable income.
Tax are due & paid on taxable income while recognised as expense on the basis of accounting income.
Accounting income (loss)
Net profit or loss for a period, reported , before income tax expense/saving
Taxable income (tax loss)
Income/loss as per tax laws, on which tax is payable/recoverable
Tax expense (tax saving)
Current tax + Deferred tax
Current tax
Tax payable (recoverable) on income for a period
Deferred tax
Tax effect of timing differences.
Timing differences
Differences originating in one period capable of reversal in subsequent periods
Permanent differences
Differences which are not reversible subsequently
DEFERRED TAX EFFECTTwo type of differences
Permanent
No Asset/Liability
Timing
Tax Asset/Liability
RECOGNITION
Determine Net Profit or Loss after Tax Expense/Saving
If Timing Difference then
Deferred Tax Asset/Liability subject to prudence
In case unabsorbed Depreciation/Accumulated Losses then DTA to the extent reasonably
certain future tax income will be available for setoff
Basis of reasonable certainty
Past records
Realistic estimates
MEASUREMENTCurrent Tax Deferred Tax
Assets/Liabilities
Example In case of Individual
(A.Y. 2001 –2002 ) 10+ 20 + 30 = 60 Average : 60/3 = 20%
Use 20% for measuring DTA and DTL.
At rates as per current law At rates which are enacted or substantively enacted
In case of slab then average rate of tax
No Discounting
Re-assessment of Unrecognized Deferred Tax Assets – Annually
Review of DTA
- Carrying amount Annually
- Write up / Write down of DTA on the basis of reasonable certainty
Set Off When
DTA/DTL relates to same Tax
Laws
Right Legally
Enforceable Presentation and
Disclosure
Current Tax Deferred Tax
Intends to settle A/L on
net basis
DTA/DTL relates to same
Tax Law
Right Legally Enforceable
OTHER DISCLOSURE
•Nature of Evidences supporting recognition
•Separately from Current Tax
•Break up in major Components
Transitional Provision
First year of application Opening DTA/DTL to
be adjusted against Revenue Reserve
Example - DTLParticulars Year 1 Year 2
Net Profit –A/c 200 200
Dep. Adj. -50 +50
Tax Profit 150 250
Tax Effect @40% 80 80
Tax Payable @40% 60 100
Create/Reverse 20 (20)
DTL
Example – DTAParticulars Year 1 Year 2
Net Profit –A/c 200 200
See 43B Adj. +50 -50
Tax Profit 250 150
Tax Effect @40% 80 80
Tax Payable @40% 100 60
Create/Reverse 20 (20)
DTL
Illustrative Timing Difference
Year 0 WDV in A/c 100
Tax WDV 100
A/c Dep
Tax Dep
Diff. Tax Effect
Cum effect
1 75 63 25 37 -12 -4.8 -4.8
2 56 40 19 23 -4 -1.6 -6.4
9 5 2 5 2 1 0.4 -1.2
10 1 1 4 1 3 1.2 0
99 99 0
Analysis of Timing Difference
1 A/c Income> Tax Income Tax Effect> Tax Payable
DTL
2 A/c Income> Tax Income Tax Effect> Tax Payable
DTA
3 A/c Income> Tax Loss-C/F Tax Effect, No Tax / MAT
DTL / DTA
4 A/c Loss< Tax Loss C/F Advtage. Less in future
DTL
5 A/c Loss> Tax Loss C/F Advtage. More in future
DTA
6 A/c Income, A/c Loss Tax Effect<Tax Payable
DTA
Accounting Standard – 23
Accounting for investment in associates in
consolidated financial statements
DEFINITIONS
An Associate
• Is an enterprise in which the investor has
significant influence and which is neither
a subsidiary nor a joint venture of the
investor.
ControlThe ownership, directly or indirectly through
subsidiaries, of more than one-half of the voting
power of an enterprise
Control of the composition of the board of
directors /corresponding governing body
Significant influence
power to participate in the financial and/or operating policy decisions but not control over those policies.
Subsidiary enterprise that is controlled by another enterprise
(known as the parent).
Group
parent and all its subsidiaries.
Equity residual interest in the assets of an enterprise after
deducting all its liabilities.
Consolidated Financial statements
financial statements of a group presented as those of a single enterprise.
The equity method
• method of accounting
• the investment is initially recorded at cost, identifying any goodwill/capital reserve
•carrying amount of the investment is adjusted for the post acquisition change in net assets.
•The consolidated profit and loss reflects the investor’s share of the results .
ACCOUNTING IN THE EQUITY METHOD
Goodwill/capital reserve arising - included in the
carrying amount but disclosed separately.
Intragroup balance Intergroup transaction eliminated.
Unrealisable losses from intragroup transactions
eliminated (don’t eliminate when even cost can’t be
recovered)
Investor ensure that Reporting date are same.
• If not associate should prepare for the same date.
• If, impracticable, different date statement can be used.
• Investor - make adjustment for the effect of any
• significant events between the dates.
Uniform Accounting Polices
investor recognize its share of results after
providing for preference dividend
If Carrying Amount < = loss then reported at NIL
value and further loss is not booked
Exception
Additional losses are provided to the extent that the investor has incurred obligation or made payments on behalf.
SIGNIFICANT INFLUENCEAn investor holds directly or indirectly 20% or more or less of the voting power by this it is not evidenced that investor has significant influence unless it can be clearly demonstrated.
The existence of significant influence is evidenced in following ways:
Representation on the BOD / corresponding governing body
Participation in policy making processes.
Material transactions
Interchange of managerial personnel.
Provision of essential technical information.
ACCOUNTING FOR INVESTMENTS
Accounted for under the equity method except.
†Investment is acquired and held for subsequent
disposal in near future.†severe long-term restriction on associates
(Accounting should be as per AS-13.)†Accounting under equity method should discontinue
from the date that - it ceases to have significant influence.
Disclosure required as per A S – 4.
Appropriate listing and description
Investment disclosed as long term investment.
Investor’s share in results disclosed separately.
Investor’s share of any extraordinary / prior period
item should be disclosed separately.
Associate having different Accounting Policy
Name of the Associates -reporting date is different.
Accounting Standard – 24
DISCONTINUING OPERATIONS
Applies to all discontinuing operations of an enterprise.
DEFINITIONS
Discontinuing Operation
is a component of an enterprise:
• that the enterprise, pursuant to a single plan, is:
disposing of substantially in its entirety
disposing of piecemeal
terminating through abandonment;
• that represents a separate major line of business or geographical area of operations; and
• that can be distinguished operationally and for financial reporting purposes.
Initial Disclosure Event the occurrence of one of the following, whichever occurs
earlier:
the enterprise has entered into a binding sale agreement for substantially all of the assets or
the enterprise’s BOD/governing body has both
approved a detailed, formal plan for the discontinuance and
made an announcement of the plan.
RECOGNITION AND MEASUREMENT
On occurrence of initial disclosure event
the net realizable value of the assets should be estimated
if carrying amount < realisable value
the estimated loss - recognised
After initial recognition
On every balance sheet date, till the discontinuance is completed, estimate the net realisable value of assets and recognise any additional loss or reversal of estimated loss.
For any gain or loss that is recognized on the disposal
of assets or settlement of liabilities
The amount of the pre-tax gain or loss
Income tax expense relating to the gain or loss
Net Selling Price
DISCLOSURE
•Initial disclosure event till discontinuance is completed
* description
* the date and nature
* the date or period in which the discontinuance is completed
* the carrying amounts,of the total assets and the total liabilities to be disposed of;
* the amounts of revenue, expenses, and pre-tax profit or loss from ordinary activities during the current financial reporting
period, and the income tax expense
* the amounts of net cash flows.
Initial disclosure event – Dealt in accordance of AS-4.
When an enterprise disposes of assets or settles liabilities it should
include in its financial statements the net selling price.
Any significant change in the relating to the assets to be disposed
or liabilities to be settled and the events causing those changes.
Fact & effect, if an enterprises abandons or withdraws from a plan
that was previously reported as discontinuing operations.
in Interim Financial Reports describe any significant activities or
events and any significant changes
These Disclosures
either
in the notes to the FS or
on the face of of the FS
Except
pre tax gain or loss recognised on the disposal of assets or settlement of liabilities
shown on the face of the statement of P&L.
Restatement of prior periods
segregate continuing and discontinuing assets & liabilities, revenue, expenses and cash flows.
DISCLOSURES
Accounting Standard - 25
INTERIM FINANCIAL REPORTING
Applicability And Scope
Enterprises, electing to prepare IFS
Does not mandate frequency of reporting
Requirements for cash flow applies as in annual FS
Effective from 1.4.2002
Objective
PRESCRIBE
minimum content
Principles for recognition and
measurement in a complete or
condensed financial statements
Timely and reliable reporting for better understanding
of the readers
Definitions
Interim period
Reporting period shorter than a full
financial year
Interim financial report
Financial report containing
Complete/Condensed set of FS for an interim period
Minimum Components
Condensed
balance sheet
Condensed statement of
profit and loss Condensed cash flow statement
Selected explanatory
notes
Use of complete sets of FS not prohibited.
Complete Financial Statement
Condensed Financial Statements
Conform to the requirements as applicable to Annual FS
•Include Minimum each of headings or
Sub Headings as in Annual FS
•Selected Explanatory Notes
•Additional line items if omission
leads to a misleading impact
Forms and Contents
EPS where required to be presented as per AS 20
Selected Explanatory Notes
Explanations of the Events and transactions that are significant to an understanding of the changes in the financial position and
performance since last reporting date.
Same accounting policies, if changed then description of nature/effect
Explanatory comments on seasonality of operations
Nature and amount of items which are unusual
nature and amount of changes in estimates
Reported in prior interim periods of current financial year
Reported in prior financial years
Issuances, buy-backs, repayments and restructuring of debt, E/PE
Dividends, aggregate or per share, separately for equity/others
Segment reporting as per AS-17
Effect of changes in composition of enterprise
Material changes in contingent liabilities
Other disclosures as required by the other AS
Periods of Interim Financial Statements
Balance Sheet Cash Flow
Statement
P&L
Current interim period prepared upto year to date with comparative figures of same period in preceding year
Recognize how to measure, classify, or disclose item in IFR materiality should be
assessed
Separate IFR for final interim period may not be prepared
Disclose
Significant changes in estimates separately as per AS-5
Recognition And Measurement
•Same accounting policies except changes taken place after the recent financial
statements
•Seasonal or occasional revenues not to be anticipated or deferred
•Unevenly incurred Costs should be anticipated or deferred only if, it is appropriate
to anticipate or defer the same at the end of financial year
•Measurements and use of estimates should be such that all material financial
information relevant for understanding the financial position or performance are
disclosed
•Change in accounting policy, should be made retrospectively from prior interim
periods year
Accounting Standard - 26
INTANGIBLE ASSETS
Applicability
Expenditure incurred on intangible items during accounting
periods commencing on or after 1-4-2003
Mandatory for:
Enterprises- whose equity or debt securities listed/to be listed on a recognised stock exchange
All other reporting enterprises,-turnover for the accounting
period exceeds Rs. 50 crores.
Other enterprises during accounting periods commencing
on or after 1-4-2004
Earlier application of the AS is encouraged.
After this Standard, the following stand withdrawn :
AS - 8, Accounting for Research and Development;
AS-6, Depreciation Accounting, with respect to the amortisation (depreciation) of intangible assets; and
AS - 10, Accounting for Fixed Assets - paragraphs 16.3 to 16.7, 37 and 38.
Objective Accounting treatment for intangible assets not dealt in another AS
To recognise an intangible asset if certain criteria are met
Measure the carrying amount of intangible assets and disclosures about intangible assets.
Scope
Not applied in accounting for:
that are covered by another AS
held by an enterprise for sale in the ordinary course of business
deferred tax assets
AS 19, Leases
goodwill arising on an amalgamation and on consolidation
financial assets;
mineral rights and expenditure on the exploration for, or development and extraction of, minerals, oil, natural gas and similar non-regenerative
resources; and
arising in insurance enterprises from contracts with policyholders.
Intangible asset identifiable non-monetary asset, without physical substance,
held for
use in the production or supply , for rental to others, for administrative purposes.
Asset a resource:
controlled by an enterprise
future economic benefits are expected
Amortisation
systematic allocation of the depreciable amount of an intangible asset over its useful life.
Depreciable amount
cost less residual value.
Residual value
amount an enterprise expects to obtain at the end of assets useful life
Active Market
market where following conditions exist :
the items are homogeneous;
willing buyers and sellers can normally be found at any time;
prices are available to the public.
Impairment Loss
carrying amount > recoverable amount.
Carrying amount
amount at which an asset is recognised in the balance sheet, net of any accumulated amortisation /accumulated impairment losses
Recognition Criteriarecognised if:
future economic benefits will flow to the enterprise
the cost measured reliably.
• assess the probability of future economic benefits will exist over the useful life
• measured initially at cost.
• acquired separately- the cost measured reliably.
• acquired in an amalgamation in the nature of purchase - is accounted for in accordance with A S 14
• by way of a Government Grant - at a nominal value or at the acquisition cost
• acquired in Exchanges of Assets- is determined in accordance with AS 10
• Internally Generated Goodwill - not be recognized as an asset
Internally Generated Intangible Assets
Meets the criteria for recognition, classifies into:
RESEARCH PHASE DEVELOPMENT PHASE
intangible asset arising
from research should
not recognized
Expenditure research
recognised as an expense
An intangible asset arising from development recognised if demonstrate :
the technical feasibility
its intention to complete
its ability to use or sell
the existence of a market for the output
the availability of adequate resources
its ability to measure the expenditure
Recognition of an Expenses
Recognised as an expenses unless
forms part of an intangible assets;
item is acquired in an amalgamation in the nature of purchase and cannot be recognized as an assets
Past expenses not recognized as an assets
Subsequent Expenses recognized as an Expenses unless
it is for enabling the assets to earn future benefit
attributed to the assets
Amortization Depreciable amount of an I.A. amortised on a systematic basis
method reflect the pattern in which the economic benefits are consumed
Period reviewed at least once in a year.
Residual ValueAssumed to be Zero unless there is an commitment by third or there exist an active market.
Retirement/ Disposal eliminated from Balance Sheet.
Gains or losses (i.e. diff. between net disposal proceed and carrying amount)
Disclosure
For Each Intangible assets distinguishing between internally generated& others
Gross and net carrying amount
Useful life Amortisation methods and rates
Reconciliation
ShowingAddition
Disposals
Amortisation
Impairment loss
Other DisclosureIf amortised more than 10 years
reasons why? And factorsMaterial information
Title restrictedcommitments
Accounting Standard 27
Financial Reporting of
Interest in Joint Ventures
Scope / Status Mandatory application in case of
Accounting for interest in Joint Venture
Reporting of Assets, Liabilities, Income and Expenses of Joint
Venture in SFS/CFS of Venturers/Investors
Effective from 1.4.2002
Objective
SET OUT PRINCIPLES AND PROCEDURES FOR
Accounting of Interest
Reporting of Joint Venture Assets, Liabilities, Income and
Expenses in SFS
Joint Venture
Contractual arrangement to undertake an economic activity under Joint Control
Joint Control
Contractually agreed sharing of control
Control
Power to govern financial and operating policies
Venturer
Party having Joint Control
Investor
Party having no joint Control
Proportionate Consolidation
Method of Accounting and Reporting share Jointly controlled Entity in SFS.
Common Features
Bound by Contractual arrangement
Contractual Arrangement establishing Joint Control
FormsJointly
Controlled Operations
Jointly Controlled
Assets
Jointly Controlled
Entity
Joint Control
Identifies Decision Areas essential to Goal
Protective Rights and Participative Rights
One Venturer as Operator
No significant influence
Agreement in writing
Contractual Arrangements with Subsidiaries treated as Joint
Venture
Contractual Arrangement
Characteristics Evidences Contents
Contract between
Venturers
Minutes of Discussions
Arrangements Incorporated in
Articles
By-Laws of Joint Venture
Activity, Duration and Reporting
Obligations
Appointment of BoD/GB and
Voting rights of Venturers
Capital Contributions
Sharing of Output, Income, Expenses
and Results
Characteristics
•Use of Own Assets, Inventories, incurring expenses,liabilities and
finance•No Separate Financial Statements
Recognition of interest in Separate FS
•Assets controls and liabilities incurs
•Expenses incurred and share in income from JV
•Joint Ownership of Assets for common economic benefit
•Reflects economic reality and legal form
•Limited Accounting records
Recognition of interest Separate and Consolidated FS:
•Share in joint assets
•Liabilities incurred individually
•Liabilities incurred jointly
•Income from sale or use of share of output and expenses
•Expenses incurred in Joint Venture
Jointly Control Assets Jointly Control Operation
Common
•No Separate Establishment, Partnership or Other entity or
separate financial structure•Agreements for sharing Joint
revenue and expenses•May prepare accounts for
internal management reporting purposes
Jointly Controlled Entities
• Separate Establishment of Corporation, Partnership or Other entity
• Controls Assets, incurs Liabilities and Expenses, Earns Income
• Enter into Contracts in own name, raise finance
• Venturers entitled to share in results
• Own accounting Records and own FS
• Involves features of both jointly controlled assets and operations
Recognition of Interest in
Separate Financial Statements
As per AS-13
Consolidated Financial Statements
As Per Proportionate Consolidation Method
Excepts where
Interest is likely to dispose of in near future
jointly controlled entity operates under severe long-term
restrictions that significantly, impair its ability to transfer funds
Accounted as per AS-13
Reflect substance and economic reality
not structure or form
Line wise Consolidation as per AS-21
No set off of legal right exist
Excess losses of investors to be
recognized by the venturers
Future profits , first absorbed by the
venturers to the extent of losses
Recognition of Goodwill/Capital
Reserve
Accounting Policies
Uniform, If not adjustment,
Where no adjustment then
disclose
Reporting Period
Consistent, statements drawn to
same date, if not adjustment,
where no adjustment disclosure
Proportionate Consolidation Method
Discontinuance When
Ceases control but retains, either in whole or in part, its interest
Entity operates under severe long-term restrictions that significantly impair its ability to transfer funds Other wise
AS-13orAS-23
Cost of Investment on the date of
discontinuance
Venturer’s share in net assets adjusted with carrying amount of
Goodwill/Capital Reserve
Reporting Thereafter
Unilateral Control As per AS
21
Venturer Contributes or Sales assets to the Joint
Venture
Venturer Purchases Assets from Joint Venture
If Significant risk and reward of
ownership transferred then
recognise
portion of Gain/Loss
attributable to interest of other
Venturers
full loss where evidence of
reduction in the net realizable
value/impairment loss exist
Should not recognize its share
of profits/losses until resells
the assets to independent Party
Recognize losses immediately
in case of net realizable value or
Impairment loss
Transaction Between a Venturer and Joint Venture
Transaction between Venturer and Joint Entity
Reporting Interests in FS of an Investor
No Joint Control:
a.) In CFS as per AS-13, AS-21 or AS-23 as appropriate
b.) In SFS as per AS-13
Operators of Joint Ventures Should account for any fees in accordance
with AS-9
IN SFS
Full profit/loss
IN CFS
Same as Above
Disclosures
Common for separate and consolidated financial statements
Commitments in respect of its interests separately
• Interests and share in commitments incurred jointly
• Share of commitments of the joint ventures themselves.
Contingent liabilities to be disclose separately unless probability of loss is remote:
• Interest and share in liabilities incurred jointly
•Share of liability of the Joint Ventures themselves
•Those, which arise as Venturer is contingently liable for the liabilities of
other Venturer’sAdditional Disclosure in Separate
Financial Statement
Aggregate amounts of assets, liabilities, income and expenses related to its
interest in the jointly controlled entities
List Joint Ventures
Description of Interest in Significant Joint
Ventures
Proportion of ownership interest, name, country
of incorporation or residence in respect of Jointly
Controlled Entities
Accounting Standard - 28
IMPAIRMENT OF ASSETS
Applicability In respect of expenditure incurred on intangible items during
accounting periods commencing on or after 1-4-2004
Mandatory for:
Enterprises- whose equity or debt securities listed /to be listing on a recognised stock exchange
All other business reporting enterprises,-turnover for the accounting period exceeds Rs. 50 crores.
Other enterprises during accounting periods commencing on or after 1-4-2005
Earlier application of the Accounting Standard is encouraged.
Objectives• prescribe the procedures to ensure that assets are carried at no more than their recoverable amount
• recognize an impairment loss
• when an enterprise reverse an impairment loss and it prescribes certain disclosures .
ScopeApplied in accounting for the impairment of all assets
other than
•inventories
•assets arising from construction contracts
•financial assets, including investments
•deferred tax assets
Applies to assets that are carried at cost / at revalued amounts
Definitions
Recoverable amounthigher of an asset's
net selling price and its value in use
Value in usepresent value of
estimated future cash
flows arise from the
continuing use of an
asset and from
its disposal at the end
Net selling priceamount obtainable from the
sale parties
less costs of disposalCost of Disposal
incremental costs for disposal of an assetImpairment loss
Amount by which the carrying amount of an asset exceeds its recoverable
amount.
Discount Rate
A pre-tax rate that reflect current market assessments of the time value of money and the risks. not reflect risks for which future cash flow
estimates have been adjusted.
Carrying amount
Amount at which an asset is recognised in the balance sheet after deducting any accumulated depreciation .
Cash-generating
Unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash
inflows from other assets .
Corporate assets
Assets other than goodwill that contribute to the future cash flows.
Identifying an Asset that May be Impaired
Impaired when
Carrying Amount > Recoverable Amount.
Assess at each balance sheet date whether any assets is impaired.
If yes
Estimate the recoverable amount .
In assessing an enterprise should consider the following
External sources of information
Internal sources of information
an asset's market value declined evidence is available of obsolescence or physical damage
significant changes with an adverse
effect in the technological, market,
economic or legal environment
significant changes with an adverse effect- changes include plans to
discontinue or restructure the operation
market interest rates or other market
rates of return - increased
economic performance of an asset is / will be worse than expected
the carrying amount is more than its
market capitalisation
Measurement of Recoverable Amount Not necessary to determine both an asset's net selling price and its value in use.
Possible to determine net selling price, even if an asset is not traded in an active market.
If an asset not traded in an active market, the recoverable amount may be taken to be its value in use.
Recoverable amount - for an individual asset
If not possible recoverable amount is determined for the cash-generating unit to which it belongs, unless
The asset's value in use can be estimated to be close to its net selling price and net selling price can be determined.
Net selling price is higher than its carrying amount
EitherOr
Net Selling Price
The best evidence is a price in a binding sale
agreement adjusted for incremental costs
If asset is traded in an active market –
market price less cost of disposal
Based on best information available, at the balance sheet
date
If this not
If both are not available
Basis for Estimates of Future Cash Flows
Based onReasonable and supportable assumptions
The most recent financial budgets/forecasts
Composition of Estimates of Future Cash Flows
Estimates of future cash flows should include: projections of cash
inflows projections of cash outflows necessarily incurred for the cash
inflows net cash flows- on disposal of
assets
Estimates of future cash flows not include flows arise from:
a future restructuring which is not yet committed
future capital expenditure for improving /
enhancing the asset
cash inflows or outflows from financing activities;
income tax receipts or payments.
Recognition and Measurement of an Impairment Loss
RECOVERABLE AMOUNT < CARRYING AMOUNT
Carrying amount of the asset reduced to its recoverable amount.
Reduction is an impairment loss.
recognised as an expense immediately,
if revalued assets than according to AS-10
IMPAIRMENT LOSS > CARRYING AMOUNT
Recognise a liability if required by another AS
The depreciation charge adjusted in future periods to allocate the asset's revised carrying amount less its residual value
Cash-Generating UnitsIdentification
•If not possible to estimate the recoverable amount of the individual asset, an enterprise
should determine the recoverable amount of the cash-generating unit to which the asset
belongs.
•Cash generating unit identified consistently from period to period
What is cash generating units?Discussed in earlier slides
Goodwill•In testing cash generating unit for impairment
•goodwill related to this cash-generating unit is identified in FS
Perform Bottom Test
Whether carrying amount of goodwill can be allocated on a reasonable and consistent
basisthen, compare the recoverable amount to its
carrying amount
Perform Top-Down Test
identify the smallest cash-generating unit to which the carrying amount of goodwill can be allocated on a reasonable and consistent
basis
then, compare the recoverable amount of the larger cash-generating unit to its
carrying amount
Corporate AssetsIn testing a cash-generating unit for impairment identify all the corporate assets on these CA
If carrying amount can allocated on a reasonable basis
If not
Impairment Loss for a Cash-Generating Unit
Allocated to reduce the carrying amount in the following order:
Carrying amount not reduced below the highest of
its net selling price
perform Top Down Test perform Bottom Test
to goodwill allocated tothe cash-generating unit
then, to other assets unit on a pro-rata basisand
its value in use
zero.
Reversal of an Impairment Loss
Assess at each balance sheet date –
There is any indication that an impairment loss recognised- may no longer exist
for this an enterprise should consider, as a minimum, of
External sources of information
Internal sources of information
•the asset's market value has increased
•significant changes with a favorable
effect environment
•market interest rates or other market rates
have decreased
•significant changes that includes capital expenditure
incurred on improvement
•Better performance
evidence is available
Disclosure:
An enterprise that applies AS-17 should disclose above for each reportable segment
If amount of impairment loss or reversal of impairment loss material to the FS then an entity should disclose:
For each type of assets
•impairment losses recognized
•reversal of impairment losses
•impairment losses recognized against revaluation reserve
•reversal of impairment losses against revaluation reserve
For an Individual Assets As a whole
•Event and circumstances
•Amount
•the nature; and the reportable segment
•For a cash generating unit- description; amount; current and former way of aggregating assets
•Recoverable amount and basis
•The main classes of assets affected by
impairment
•Events and circumstances